Also called: Ongoing charges figure, OCF, TER.
An expense ratio never appears on a statement as a charge, which is exactly why it goes unnoticed. It is netted out of the fund’s returns continuously, so a fund with a 0.75% expense ratio and a 7% gross return reports 6.25% and nobody sees a line item.
The difference between 0.03% and 0.75% sounds negligible and is not. Over forty years, the gap compounds against you in the same way returns compound for you — the fee is charged on the growing balance, including on the growth the fee itself prevented.
Expense ratios are also not the only fee. Platform fees, advisory fees, transaction costs and bid-ask spreads sit alongside them, and it is the total that matters. A cheap fund inside an expensive wrapper is not a cheap arrangement.
This is the rare part of investing that is both entirely under your control and reliably worth money. You cannot choose your returns; you can choose your costs.
Research on this
See also
- Fee drag — The cumulative reduction in a portfolio’s final value caused by annual fees, including the compounded growth those fees prevented.
- AUM fee — A fee charged as a percentage of the assets a manager oversees, typically 0.5% to 1% a year, billed regardless of whether the portfolio gained or lost.